Mortgage Servicers Are Hugely Conflicted

Information is everything. Those who control the information have immense power. The allegiances of those in control of the info obviously have an enormous impact on how the information is processed and dispensed. The potential for conflicts of interest are significant. Standard business fare, correct? Have these conflicts played out on Wall Street? All too often. How so?

I have repeatedly highlighted the conflicts within our financial regulatory structure. We also know that the credit rating agencies have been enormously conflicted. Anywhere else? Let’s enter the world of mortgage servicing, …..

What Does Mortgage Servicing Rights – MSR Mean?
A contractual agreement where the right, or rights, to service an existing mortgage are sold by the original lender to another party who specializes in the various functions of servicing mortgages. Common rights included are the right to collect mortgage payments monthly, set aside taxes and insurance premiums in escrow, and forward interest and principle to the mortgage lender.

Seems like a fairly simple business, correct? Who are the largest mortgage servicers? No surprise that the largest servicers just so happen to be the largest mortgage originators, those being Wells Fargo, JP Morgan Chase, and Bank of America. Where is the conflict? The servicers not only manage the cash flows from mortgages for their parents but they also manage the cash flows from the mortgages that are backing a wide array of securitized, structured transactions. As such, the servicers are positioned to protect the interests of investors to make sure that principal and interest payments are made on the transaction. Where is the conflict? Let’s navigate.

What happens when investors question the integrity or lack thereof of mortgages that have been underwritten by a bank that then packaged the loan into a securitized transaction? What’s that, you say, you want the layman’s version? What happens when a bank or related entity fraudulently underwrites and conveys a loan into a deal? Shouldn’t the servicer unearth that loan and put it back to the bank which underwrote it in the first place? In theory, one would think the servicer should do that. In practice, do they? In the current environment in which a LOT of mortgages were poorly, if not fraudulently, underwritten this issue presents a major conflict for the servicers and a potential MAJOR liability and loss for the banks.

Fannie Mae’s and Freddie mac’s regulator may identify as much as $30 billion of debt included in mortgage bonds that the companies can force sellers to repurchase, according to Joshua Rosner, an analyst who in 2007 predicted the collapse in the market for the securities.

The Federal Housing Finance Agency this month said it issued 64 subpoenas seeking loan files and other documents related to so-called non-agency mortgage securities bought by the two government-supported companies. The U.S. is trying to determine whether misrepresentations might require issuers to repurchase debt, producing funds from firms that may include Wall Street’s largest banks to help repay taxpayer money.

If the large Wall Street banks are forced to repurchase fraudulently underwritten mortgages won’t this simply be a refiltration process of taxpayer funds. Yes, I believe it will be. However, what about the servicers. Where are they in this process? Aren’t they compelled to perform and protect investors in the deals? One would think. But who eats the losses on the poorly and fraudulently underwritten loans? The servicers’ parents, those being the banks. Bloomberg offers,

Mortgage servicers have hindered investors’ efforts to get debt repurchased by denying them access to loan files, citing a right to do so if they don’t own at least 25 percent of the deals, said Bill Frey, head of Greenwich, Connecticut-based securities firm Greenwich Financial Services LLC.

“The subpoenas will hopefully stop the silliness,” Frey, who sued Bank of America’s Countrywide unit in 2008 over its servicing practices, said in a telephone interview.

Standard fare? Perhaps, but when you are talking about billions of dollars in losses, the conflicts are certainly not standard. Regrettably in the oligopoly currently operating on Wall Street, the conflicts embedded in mortgage servicing are truly accentuated.

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.